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Cablegate: Ethiopia Monthly Economic Review for June 2007

VZCZCXRO0632
RR RUEHROV
DE RUEHDS #2324/01 2050842
ZNR UUUUU ZZH
R 240842Z JUL 07
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 7122
INFO RUCNIAD/IGAD COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0056
RUEANHA/FAA NATIONAL HQ WASHINGTON DC

UNCLAS SECTION 01 OF 02 ADDIS ABABA 002324

SIPDIS

SIPDIS

STATE FOR AF/E, AF/EPS, AND EB/TRA

E.O. 12958: N/A
TAGS: ECON ETRD EINV EAGR EAIR ET
SUBJECT: ETHIOPIA MONTHLY ECONOMIC REVIEW FOR JUNE 2007

REF: A. ADDIS ABABA 777 (NOTAL)
B. ADDIS ABABA 421 (NOTAL)

ADDIS ABAB 00002324 001.2 OF 002


1. SUMMARY:
-- The GOE approved a federal budget of USD 4.9 billion for fiscal
year 2007/08, a 20 percent increase over the previous year.
-- The IMF reports that the Ethiopian economy grew by an average of
10.7 percent annually in the past three years, with 9.4 percent
estimated for this year.
-- The official exchange rate of the Ethiopian Birr is depreciating
significantly against the U.S. dollar.
-- Ethiopia's central bank announced adjustments on the reserve
requirement ratio and the minimum deposit interest rate policy.
-- In May, consumer prices had risen by 17.3 percent over the
previous year.
-- Starbucks has agreed to a wide-ranging accord with Ethiopia to
support and promote its coffee, ending a long-running dispute.
-- Deutsche Lufthansa AG, Europe's second-biggest airline, has
agreed to code-share with state-run Ethiopian Airlines. END
SUMMARY.

--------------------------
NEW FEDERAL BUDGET ADOPTED
--------------------------

2. On July 7, Parliament approved a USD 4.9 billion federal
government budget for FY 2007/08, endorsed earlier by the Council of
Ministers on June 13. (NOTE: The Ethiopian fiscal year runs from
July 8 to July 7. END NOTE.) The proposed federal budget exceeds
the previous year's by 20 percent. According to information
obtained from the Prime Minister's office, nearly USD 1.2 billion
(24.5 percent) is earmarked for recurrent expenditures, and over USD
2.0 billion (42.2 percent) for capital expenditures. The balance
constitutes regional transfers (i.e., from the federal government to
Ethiopia's regional states). Additional details will be reported
SEPTEL.

-----------------------------------------
IMF HIGHLIGHTS ECONOMIC GROWTH, INFLATION
-----------------------------------------

3. The IMF Board of Directors issued a statement on June 15 praising
Ethiopia's consecutive economic growth for the past three years as
the fastest in Ethiopia's recent history. The IMF said not only had
the government registered an annual real per capita increase of 7
percent, but also that economic expansion had significantly
contributed to poverty reduction and progress towards the Millennium
Development Goals. However, the expansion in the economy is not
without challenges: according to the IMF, consumer prices rose by 19
percent in February 2007. Balancing growth with inflationary
pressure has become a major preoccupation for the GOE. Fiscal
deficit, pressure on domestic prices, and an economy vulnerable to
weather and dependent on development partners, are also factors that
pose serious challenges. The IMF states that "a critical challenge
for Ethiopia is to accelerate structural reforms to buttress and
sustain growth, while maintaining macroeconomic stability."

4. The IMF states that the Ethiopian economy grew by an average of
10.7 percent annually in the past three years, with 9.4 percent
estimated for this year. The GOE argues that monetary growth,
mainly driven by credit expansion, was consistent with growth in
nominal GDP. Despite this, however, inflation has been rising over
the last two years. Annualized national headline inflation reached
17.3 percent in May 2007, in contrast to 12.3 percent in June 2006
and 8.6 percent in June 2005.

------------------------------------
EXCHANGE RATE: DEPRECIATING CURRENCY
------------------------------------

5. Ethiopia follows a dirty floating exchange rate regime; the IMF
called it a crawling peg. The Ethiopian Birr is pegged to the U.S.
dollar, and the rate is determined by the daily inter-bank foreign
exchange market. The National Bank of Ethiopia (central bank)
regulates the foreign exchange market through intervention. Over
the past several years, the exchange rate has been slowly and
steadily depreciating by about Birr 0.0001 daily. As a result of
the pressure on balance of payments problems, the official exchange
rate has showed significant depreciation since December 2006. The
exchange rate of the Birr against the USD at the end of June 2007
reached 9.03 Birr/USD, in contrast to 8.71 Birr in December 2006,
8.69 Birr in June 2006, and 8.65 Birr in June 2005. The parallel
market rate at the end of June 2007 reached 9.30 Birr, reflecting
the pressure on the foreign exchange demand. Driven by rising
domestic inflation relative to prices of Ethiopia's trading
partners, the real effective exchange rate is appreciating, making
the country's exports less competitive.


ADDIS ABAB 00002324 002.2 OF 002


--------------------------
INTEREST RATE DEVELOPMENTS
--------------------------

6. The National Bank of Ethiopia (central bank) began determining
the maximum lending and minimum deposit interest rates since October
1992. Several adjustments have been made to the interest rate
policy to induce investment and growth. Since January 1998, the
Bank has allowed the lending rate to be determined by market forces,
while it continues to control the floor deposit rate. In July 2007,
the Bank raised the minimum deposit rate to 4 percent, up from the 3
percent minimum in place since March 2002. Given the double digit
inflation rate, however, currently real interest rates are
significantly negative. The Bank also raised the legal reserve
requirement ratio of commercial banks from 5 to 10 percent of net
deposits. The Bank Governor said in a July 4 press release that
these policy measures were taken to curb the pressure from
prevailing inflation.

------
PRICES
------

7. Except during some episodes of drought and macroeconomic shocks,
Ethiopia has historically been among the low inflation countries in
sub-Saharan Africa. Since over 60 percent of the weights in the
Consumer Price Index (CPI) constitute food items, the CPI largely
depends on performance of agriculture. The trend in the CPI in the
past two years was, however, quite contrary to this historic trend.
Official statistics indicate that average agricultural value added
grew by 14 percent in the past three years, while the annualized
headline inflation rate has been steadily rising and reached 17.3
percent in May 2007, in contrast to 12.3 percent a year earlier.

--------------------------------------------
LONG-STANDING ISSUES WITH STARBUCKS RESOLVED
---------------------------------------------

8. Starbucks has agreed to a wide-ranging accord with Ethiopia to
support and promote its coffee, ending a long-running dispute (REF
A) over the issue. The U.S. retailer will market, distribute and,
in some cases, license Ethiopia's range of high-quality coffee
brands. A row over the recognition and use of trademarks for its
coffee had stymied cooperation between the two sides. It is hoped
the deal will act as a catalyst to raise the value of coffee exports
and thus improve the livelihoods of Ethiopian farmers. The
agreement acknowledges Ethiopian ownership of popular coffee
designations such as Yirgacheffe, Harar, and Sidamo whether they are
registered or not. It will also allow Starbucks to use coffee types
in certain markets under agreed conditions. Ethiopian farmers will
not receive royalty payments from the deal, but it is hoped that
more effective distribution and marketing will help boost demand
and, in time, lift prices of exports.

--------------------------------------------- -
ETHIOPIAN AIRLINES TO CODESHARE WITH LUFTHANSA
--------------------------------------------- -
9. Deutsche Lufthansa AG, Europe's second-biggest airline, and
state-run Ethiopian Airlines agreed to sell seats on each other's
flights to expand their networks. The companies signed a
code-sharing agreement on the margins of a July aviation conference
in Vancouver. The accord will take effect by mid-year, Lufthansa
CEO Wolfgang Mayrhuber said. Ethiopian Airlines CEO Girma Wake has
indicated the airline is considering joining either Star Alliance or
Oneworld. (COMMENT: Ethiopian Airlines' code-share with Lufthansa
is a positive step and will facilitate its code-sharing with United
Airlines, via Star Alliance membership; see REF B. END NOTE.)
YAMAMOTO

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